Market evidence on U.S. strike in Iran re-opens debate on Bitcoin role as safe haven

Over the last weeks, we have discussed a lot about the possible role of Bitcoin as a safe haven. Over the last days we had another test about this idea, which came from the market behaviour after the news of a U.S. strike in Iran.

The traditional market was swift to react to the news of the airstrike. As reminded by Sead Fadilpašić (
“Bloomberg reported on January 2 that, as tension between the U.S. and Iran escalated, stocks and American equity futures were sinking, while haven assets started rising, including gold, the yen, and treasuries. Gold rallied and West Texas oil jumped as much as +4.4%. The very next day, the media outlet said that gold rose to a four-month high, spot bullion climbed +0.9% to $ 1,542.47 an ounce, silver price increased +1.3%, platinum and palladium advanced, the yen strengthened +0.6% and oil jumped close to $ 70 a barrel.”

The most interesting point is about the evidence supplied by the air strike event on the crypto market, fuelling further the discussion on safe havens. Bitcoin fell -3.0% to $ 6,921 on January 3, before rising by a +5.0%, and seems to be still rising at the moment. Bitcoin trades at $ 7,336 (Jan. 4, 8.15 PM, GMT) on Bitstamp platform.

This could be an evidence which supports the idea that Bitcoin is a safe haven. The trouble is that, until now, empirical evidence shows that the historical correlation between Bitcoin and other safe assets is very low. Therefore, we can only assume that in the future this correlation could increase, if Bitcoin will be really taken as safe haven by traders. Nevertheless, by now we must still be very careful on this conclusion.

What central banks think about CBDCs

According to a recent study by the Internationl Monetary Found’s Tobias Adrian and Tommaso Mancini-Griffoli, central banks highlighted a number of potential pros and cons of Central Bank Digital Currencies (CBDCs), one of the current hot topic of the global monetary system. According to the two officials, benefits include:

Cost of cash: In some countries, the cost of managing cash is very high due to an especially vast territory, or particularly remote areas including small islands. CBDC could lower costs associated with providing a national means of payment.

Financial inclusion: CBDC may provide a safe and liquid government-backed means of payment to the public that does not require individuals to even hold a bank account. Some central banks view this as essential in a digital world in which cash use is progressively diminishing, especially in countries where banking sector penetration is low.

Stability of the payment system: Some central banks are concerned by the increasing concentration of the payment system in the hands of few very large companies (some of which are foreign). In this context, some central banks view CBDC as a means to enhance the resilience of their payment system.

Market contestability and discipline: Relatedly, some central banks view CBDC as potentially offering competition for large firms involved in payments, and thus as a means to cap the rents they can extract.

Countering new digital currencies: Some central banks view CBDC as healthy — potentially necessary—competition against privately issued digital currencies, some of which may be denominated in foreign currencies. These central banks believe a domestically issued digital currency backed by the government, denominated in the domestic unit of account, would help reduce or prevent the adoption of privately issued currencies, which may be difficult to regulate.

Support Distributed Ledger Technology (DLT): Some central banks see the virtue of DLT-based CBDC to pay for DLT-based assets. If these assets proliferate, DLT-based currency would facilitate automatic payments when assets are delivered (so-called “payment-versus-delivery,” or “payment-versus-payment,” which could be automated using smart contracts). Some central banks are considering the option of providing CBDC only to institutional market participants in order to develop DLT-based asset markets.

Monetary policy: Some academic scholars view CBDC as a means to enhance the transmission of monetary policy. They argue that an interest-bearing CBDC would increase the economy’s response to changes in the policy rate. They also suggest that CBDC could be used to charge negative interest rates in times of prolonged crisis (thus breaking the “zero lower bound” constraint), to the extent cash were made costly.

Despite these potential benefits, various challenges could emerge. Some of these can be attenuated by the appropriate design of CBDC.

Banking-sector disintermediation: Deposits could be withdrawn from commercial banks, should people decide to hold CBDC in significant volume. Banks would have to raise more expensive and runnable wholesale funding, or raise interest rates on deposits to retain customers. As a result, banks would either experience a compression of margins, or would have to charge higher interest rates on loans. The extent to which CBDC will compete with commercial bank deposits in normal times will depend in part on interest rates paid on CBDC, if at all. A non-interest bearing CBDC would come closest to simply replacing cash.

“Run risk”: In times of crisis, bank customers could flee from deposits to CBDC, which might be seen as safer and more liquid. However, in many jurisdictions, credible deposit insurance should continue to dissuade runs. In addition, safe and relatively liquid assets already exist in many countries, such as government bond funds, or state banks. Though evidence and country coverage is limited, academic studies do not point to systematic runs towards these alternative assets in crisis times. Moreover, if a run occurred, the central bank would be more easily able to meet deposit withdrawal requests with CBDC as opposed to cash. In addition, in many countries around the world, bank runs typically coincide with runs from the currency. Thus, whether or not local-currency CBDC existed, depositors would seek refuge in a foreign currency.

Central bank balance sheet and credit allocation: In case demand for CBDC is high, the central bank’s balance sheet could grow considerably. In addition, the central bank may need to provide liquidity to banks that experience rapid and large funding outflow. As a result, central banks would take on credit risk, and have to decide how to allocate funds across banks, opening the door to political interference.

International implications: CBDC of reserve currency countries available across borders could increase currency substitution (“dollarization”) in countries with high inflation and volatile exchange rates. These prospects need to be studied further, along with implications for the international financial system. IMF staff are currently investigating these questions.

Costs and risks to the central bank: Offering CBDC could be very costly for central banks, and it could pose risks to their reputations. Offering full-fledged CBDC requires central banks to be active along several steps of the payments value chain, potentially including interfacing with customers, building front-end wallets, picking and maintaining technology, monitoring transactions, and being responsible for anti-money laundering and countering the financing of terrorism. Failure to satisfy any of these functions, due to technological glitches, cyber attacks, or simply human error, could undermine the central bank’s reputation.

China may soon have its first blockchain ETF

As reported by Wolfie Zaho ( China’s financial watchdog Securities Regulatory Commission has recently received an application for listing an ETF which enables to track blockchain-related stocks as underlying assets. “The application was filed by Shenzhen-based asset management firm Penghua Fund and was accepted by the CSRC on Dec. 24, according to the regulator’s disclosure”, Zaho writes, adding that “the proposed ETF aims to track and reflect the performance of Shenzhen-listed public stocks that have businesses in the blockchain industry”.

If the application received final approval by the CSRC it would be China’s first completely blockchain-themed ETF open to public investors.

“The application was received at the same time the Shenzhen Stock Exchange rolled out a Blockchain 50 Index comprised of 50 stocks listed on the exchange that have entered the blockchain space. The Shenzhen exchange announced on Dec. 24 the index tracks those that are involved in different aspects of the blockchain ecosystem and selects the top 50 by market capitalization. The current index list includes software companies, banks including Ping An Bank, as well as internet companies that entered cryptocurrency mining such as Wholeasy, which invested $80 million in bitcoin miners in 2018”, the article concludes.

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